So, You Want to Be a Bank? Regulatory Process for Forming or Acquiring a Depository Institution - Part III

In this installment: The process for seeking regulatory approval to form or acquire a depository institution.

Our first installment addressed the reasons why a provider of non-bank financial services might want to operate through a depository institution, the types of charters available, and high level considerations relevant to choosing the right charter. Our second installment addressed some consequences of operating through a depository institution charter.

Chartering Process

The application process for establishing a new depository institution–whether federal or state chartered–generally takes between six months and one year. The process begins with the preparation of a detailed business plan, financial statements and projections, biographical information, operating policies and procedures, and various other application materials for submission to the chartering authority and other agencies having jurisdiction over the institution and its holding company, if any. An organizing group should identify the key members of management early in the process, since their participation will be needed to develop the business plan and to hold pre-filing meetings with regulators.

Groups proposing to form a depository institution will need to apply to the Federal Deposit Insurance Corporation and to any applicable state excess deposit insurers for deposit insurance. If there will be a holding company, organizers will also typically need to obtain approval from the Board of Governors of the Federal Reserve System (Federal Reserve), and possibly from applicable state bank regulators, to form a bank holding company or savings and loan holding company, a process discussed in our second installment.

Organizers should also consider whether their depository institution will join a regional Federal Home Loan Bank, and organizers of a state chartered institution should also consider whether the institution will become a member bank in the Federal Reserve System, as those applications are often submitted contemporaneously with the chartering process.

Concurrent with the drafting of the business plan and other materials and before filing any applications, the organizers should have one or more pre-filing meetings with the primary federal and any applicable state regulators of the proposed institution to discuss any novel or significant regulatory issues. When the application is filed, the applicant will be required to publish a notice that describes the filing and alerts the public to their ability to submit comments on the public portions of application. During the course of the regulators’ review of the application documents, additional information may be requested.

Once the charter is given preliminary approval by the chartering authority, the banking institution will be formed as a stock, public benefit, or mutual corporate organization. After satisfaction of any regulatory conditions imposed in connection with the approval, the depository institution can request final approval to begin transacting business. In some cases, federal or state bank regulators also may require a pre-opening inspection or examination before authorizing a new depository institution to commence business.

The overall application process for obtaining a special purpose FinTech charter from the Office of the Comptroller of the Currency (OCC) is substantially similar to the process described above. We note that it remains an open question whether the Federal Reserve will allow institutions operating under OCC FinTech charters to access Federal Reserve accounts and services. Positions recently taken by the Federal Reserve in the matters of Fourth Corner Credit Union (involving the provision of financial services to marijuana-related businesses) and The Narrow Bank (involving an uninsured institution’s plans to avoid the expense of deposit insurance premiums and to profit on interest spreads by investing all deposits in safe, interest-paying reserves at the Federal Reserve, rather than by engaging in lending) suggest that the Federal Reserve believes it has broad discretion to grant or deny applications for Federal Reserve accounts and services.

Composition of Management

A key factor considered by the banking regulators in approving the formation of a new banking organization is the experience and quality of the proposed management. The regulators require that proposed officers, directors, and individual controlling shareholders complete detailed biographical and financial forms and, often, fingerprint cards. The board of directors should include individuals with prior banking experience and knowledge. An institution should also have a president or chief executive officer with prior banking experience. Other management officials may include a chief financial officer or treasurer, a compliance officer, a Community Reinvestment Act officer, and an anti-money laundering and Bank Secrecy Act officer. Organizers should confirm early in the process that proposed directors and management do not have negative financial or other history that may prevent them from being cleared by regulators.

Further, each insured depository institution must establish an audit committee of its board of directors. For an institution with total assets of $500 million or more but less than $1 billion, the audit committee members must be outside directors, and a majority must be independent of management. For institutions with total assets of $1 billion or more, all audit committee members must be outside directors who are independent of management. The proposed board of directors should include a sufficient number of directors who meet these independence requirements. From a governance perspective, even when not required, including one or more independent directors may be helpful.

The National Bank Act and some state laws impose residency requirements on bank management. For instance, under the National Bank Act, each director of a national bank must be a citizen of the United States, and the majority of the directors must have resided in the state in which the national bank is located (or within 100 miles of the location of the main office of the national bank) for at least one year preceding their election and must continue to meet the residency requirement on an ongoing basis. The OCC may waive this residency requirement, and it may waive the citizenship requirement for a minority of directors.

Federal banking laws and certain state’s laws also restrict director and senior management interlocks between competing and certain very large banking organizations. Any organization considering establishing or acquiring a depository institution must consider the effect of these management interlock prohibitions on the composition of management. The restrictions on interlocks apply not only to the board of directors and management officers of the depository institution but can, in some cases, affect the composition of directors and officers throughout an organization.

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Goodwin’s Financial Institutions practice is recognized as a leading provider of banking and consumer financial services legal advice. We counsel our clients on all aspects of bank regulatory and consumer financial services law, including bank chartering proposals and bank mergers and acquisitions. Our attorneys also work with entrepreneurs seeking to establish non-bank financial services providers, including FinTech businesses, and with venture capital and private equity firms that invest in these businesses.